Cost effective protection for distributor and retailers
In product liability action, it is not unusual for a distributor or retailer to be named as a defendant in lawsuits stemming from bodily injury or property damage caused by a manufacturer’s product. A vendor’s endorsement can be added to a general liability policy issued to manufacturers which can confer coverage upon vendors and retailers. By utilizing a vendor’s endorsement, retailers can be treated as an additional insured for property damage or bodily injury as the result of the manufacturer’s product.
Retailers oftentimes face liability because they are involved in the chain of distribution after a manufacturer places a product into the stream of commerce. On some occasions, plaintiff attorneys name vendors in lawsuits to keep cases in state courts and eliminate any federal jurisdiction.
By adding a defendant in the same jurisdiction as the plaintiff, a plaintiff attorney also can defeat diversity of citizenship, thereby forcing a case to stay in plaintiff-friendly venues. Depending on where the injury occurred, retailers often have a common law cause of action for indemnity from the manufacturer. While manufacturers often will assume the defense of its vendors, if they refuse to do so, the vendor’s endorsement affords the retailer or distributor immediate protection.
No One Size Fits All
Case law interpreting vendor’s endorsements has reached different conclusions in different jurisdictions. In New York, the courts have historically rejected the view that the vendor’s endorsement covers a vendor’s act of negligence. In the event that the vendor modifies a product, like improperly installing a bicycle pedal, coverage would be denied. In this case vendor’s endorsements would be seen as a cheap add-on to product liability coverage.
The majority view, however, is that a vendor has coverage for its own negligence when the claim originates from the product, unless the negligent act that caused harm by the vendor was specifically excluded from coverage. If the negligent act was specifically excluded from coverage, the courts hold that the injury or losses originating from the vendor’s conduct are covered by the vendor’s endorsement.
A good example is found in the case of Pep Boys v. Cigna Indemnity Insurance Company of North America, 692 A.2d 546 (N.J. Super. Ct. App. Div. 1997). In this case, a 14-year-old purchased Freon at a Pep Boys store. After inhaling the fumes, the 14-yearold died from acute Freon toxicity.
After litigation ensued, the insurer denied coverage due to the negligent sale of Freon to a minor, which violates New Jersey’s applicable statute. While the lower court initially found coverage, the Court of Appeals reversed, finding that the endorsement did not contain an exclusion for the vendor’s negligence and that failure to specifically exclude the vendor’s negligence conferred coverage.
California has developed a blended nexus test to determine findings in certain product liability law suits. In Shade Foods Inc. v. Innovative Products and Sales Marketing, Inc., 93 Cal Rep. 2nd 64 (Cal. App. 2000), the plaintiff brought suit claiming that diced almonds purchased from Innovative Product Sales contained wood splinters before they were made into nut clusters and cereal products. The insurer on the policy for the almond manufacturer relied on the exclusion in vendor’s endorsement which provided “products which, after distribution or sale by you, have been… used as… a part or ingredient of any other thing or substance by or for the vendor to deny coverage.” The vendor claimed there was no nexus between the vendor’s incorporation of the almonds into another product and the resulting damage. The court found that the incorporation did not create any new defect causing the third party injury. The court therefore found that a “nexus” was lacking. In other words, the vendors act incorporating the defective almonds into its product lacked “nexus” with the ultimate injury and therefore its conduct was covered.
In the event that a retailer is found not to be entitled to coverage under the manufacturer’s policy, litigation for indemnity or contribution is virtually guaranteed. The cost incurred with regard to litigating whether or not a retailer is, or should be, covered under a manufacturers policy may prove to be cost prohibitive. Discussing these matters with any manufacturers for whom you obtain product liability policies, will not only ensure that the insured has been adequately advised as to the scope of possible coverage, but should also serve to reduce errors and omissions claims in that regard.